COMPUTERIZED ACCOUNTING
ACCOUNTING INFORMATION SYSTEM
System
A System is a set of interacting parts or components that attempts to achieve one or more
goals. A system must have Multiple Components and should be related, although each
part functions independently of the others, all parts serve a common objective.
System has three basic interacting components or Functions, i.e. Input, processing and
output. And these are explained below:a) Input. Input involves capturing and assembling elements that is entered in the system
to be processed. In other words, inputs provide the system with what it needs to be
able to operate.
b) Process. Processing involves the transformation of an input into an output. Processes
may involve tasks performed by humans, plant, computers, chemicals and a wide
range of other actions. Processes may consist of assembly, for example where
electronic consumer goods are being manufactured, or disassembly e.g. where oil is
refined.
c) Output. Output is the end result of the transformation process. Output involves
transferring elements that have been produced by a transformation process to their
ultimate destination. They could be said to represent the purpose for which the system
exists, and many outputs are used as inputs to other systems. E.g. Reports
d) System boundary. Systems boundaries may be natural or artificially created for
example, an organization’s department structures are artificially created. Every
system has a boundary that separates it from its environment, for instance a cost
accounting department’s boundary can be expressed in terms of who works in it and
what work it does. This boundary will separate it from other departments such as the
financial accounts department.
e) The environment. Anything which is outside the system boundary belongs to the
system’s environment and not to the system itself. A system accepts inputs from the
environment. The parts of the environment from which the system receives inputs
may not be the same as those to which it delivers outputs. The environment exerts a
considerable influence on the behavior of a system; at the same time the system can
do little to control the behavior of the environment.
f) Feedback. Feedback is referred to as control information generated by the system
itself and involves a comparison of actual results against the target or plan. In a
business organization, feedback is information produced from within the
organization, for example management control reports, intended to help management
and other employee to trigger control decisions. Feedback may be negative or
positive depending on what control action it initiates.
i)
Negative feedback. This is information which indicates that the system is
deviating from its planned or prescribed course and that some re-adjustment is
necessary to bring it back on to course. This feedback is called ’negative’
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ii)
because control action would seek to reverse the direction or movement of the
system back towards its planned course.
Positive feedback. Positive feedback occurs when there is some kind of problem
in the feedback loop. It results in control action which causes actual results to
maintain or increase their path of deviation from planned results.
Systems Boundary
Inputs
Processing
Output
s
Feedback
Environment
g) Control system. Control involves monitoring and evaluating feedback to determine
whether a system is moving toward the achievement of its goals. The control function
then makes necessary adjustments to a system’s input and processing components to
ensure that proper output is produced. Control is required because unpredictable
disturbances arise and enter the system, so that actual results, that is, outputs of the
system deviate from the expected results.
Subsystem: A subsystem is the interrelated parts that have come together, or integrated,
as a single system. Most systems are composed of smaller subsystems a part of a system.
Data and information
Data refers to streams of raw facts representing events occurring in organizations or the
physical environment before they have been organized and arranged into a form that
people can understand and use.
Therefore, data are facts that are collected, recorded, stored, and processed by an
information system.
Organizations collect data about:
 Events that occur
 Resources that are affected by those events
Accounting Data: This comprise of numerical facts which only relate to those
transactions and events that are financial and economic in character and nature
This accounting data is disorganized and disjointed in its raw form. It is not capable of
being understood and support financial decision making.
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Sources of Accounting Data:
Accounting data must be supported by documentary evidence, e.g. vouchers, receipts,
invoices etc support the data
Examples of Accounting Data: Raw accounting data may include but not limited to;
vendor names, sales dates, amounts, hours worked, units processed or even planned,
employee vacation days earned, and customer telephone numbers are all data that are
entered into the accounting information system.
Accounting data are captured, processed, stored, and reported by the accounting system,
and represent information used for decision making by managers
Difference between data & information
Information is different from data. Information is data that have been organized and
processed to provide meaning to a user. Hence information is processed data that is
capable creating a meaning to the users.
Types of information system
The information system is the set of formal procedures by which data are collected,
processed into information, and distributed to users
There are broad classes of information systems: the accounting information system (AIS)
and the management information system (MIS).
Accounting has been defined as: the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events which are of financial
character, and interpreting the results thereof.
It is a process of identifying, recording, summarizing, and reporting economic
information to decision makers in the form of financial statements.
Accounting allows a company to analyze the financial records to allow informed decision
The AIS is composed of three major subsystems:
(1) the transaction processing system (TPS), which supports daily business operations
with numerous reports, documents, and messages for users throughout the organization
such as expenditure cycle (Purchases of goods and services, cash disbursement, payroll
processing, fixed asset purchase), revenue cycle (sales processing and cash receipt
system), Conversion cycle (Cost accounting and production planning)
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(2) the general ledger/financial reporting system (GL/FRS), which produces the
traditional financial statements, such as the income statement, balance sheet, statement of
cash flows, tax returns, and other reports required by law; and
(3) the management reporting system (MRS), which provides internal management with
special-purpose financial reports and information needed for decision making such as
budgets, variance reports, and responsibility reports.
Management information system
Which includes, financial management system, marketing system, distribution system
and human resources system
Example of Management information system applicable in functional areas
Functions
Example of activities
 Finance
Distribution






Personnel


 Marketing



Portfolio management system
Capital budgeting system
Market analysis
New product development
Product analysis
Warehouse
organization
&
scheduling
Delivery scheduling
Vehicle loading and scheduling
Human
resource
management
system
Job skill tracking
Employee benefit system
Classification of Information System (IS)
An Information system consists of an integrated set of computer-based and manual
components established to collect, process, transform, manage and distribute output
information to users for planning, decision making, and control.
Broad Classifications of IS: They are broadly categorized into; manual and computerbased information systems as seen below;
Manual Information Systems: These are systems where written data is input, processed,
output and stored on paper and there is no usage of computer technologies and systems in
these systems.
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Manual Information Systems: Tasks are completed manually through practiced routines
and there is limited reliance on information stored in, and retrieved from, either fixed
computerized databases.
Manual accounting implies that employees perform the whole accounting cycle manually
on a periodic basis: they calculate trial balances, journalize transactions, and prepare
financial statement reports and other routines. Of course it takes much time, resources
and effort in large organizations
Among the advantages of manual accounting there are:
 Comparatively cheap in terms of resources compared to computerized system.
 More reliability
 Independence from machines
 Skilled workers availability as compared to the other system
The disadvantages include:
 Reduced speed
 Increased effort of accountants
 Relatively slower internal control reporting
 Routine work and some others
Computer-based information system: includes any organized combination of people,
hardware, software, communications network and data resources to perform the activities
of input, processing, output and control activities that collect transform data resources
into information products in an organization or disseminate information in an
organization.
Specific objective /Roles of accounting information system
The system minimizing the duplication, recording, storing, reporting, and
processing, whether manual or computer-based system, it performs the following
roles: Provides information to the internal users such as accountants, employees and
management for decision making
 Provide information to external users such government, suppliers, financial
institutions, customers among others through preparation of financial reports
 Accounting information aids in the acquisition of loans from financial institutions,
 Accounting information systems help government to determine the taxes and for
policy formulations
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 Helps suppliers in determining whether to supply goods to the business on credit
or not
 Accounting information system help Customers in determining the quality of the
firm’s Product
This information is provided in the form of reports that fall into two main categories:
i.e. financial statements and Managerial reports.
COMPUTERIZED ACCOUNTING
Computerized Accounting is software that runs on a computer equipment to record, store
and analyze information on financial transactions from internal and external operations of
both small and large businesses.
Financial reports are automatically generated at the end of each accounting period of a
given company. The computerized accounting eliminates paper work making it easier and
faster to collect, store and trail all transactions as they occur.
Types /Forms of Computerized
There are various forms that include:
QuickBooks software
Tally accounting software
Pastel Accounting software
Sage accounting
Sun system
Navision
Palladium accounting 2013 business edition and Enterprise edition
Etc.
Why Computerized Accounting/Advantages of Computerized Accounting
Limiting Human error
The biggest advantage of accounting software for businesses is that most software
available has an automated system that checks for mathematical errors. Errors in
accounting can occur easily when done by hand. When errors do happen, they can create
chain reactions that cost a company untold amounts of money and time as they must
determine how the error occurred, what other areas of the business's finance it affects and
how to prevent similar errors in the future. Having a system that is fully automated
reduces the possibility for human errors
Automated Report Generation
Accounting software has the ability to generate reports on demand--something that could
take a team of humans hours or days. These reports can be customized to what the
company is spending money on, such as rent, day-to-day operations, salaries and
marketing. In addition, when used properly, this feature can assist the business in its
budgeting needs, telling executives in a quick and easy to use format exactly where their
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money is going. Reports empower executives to make informed decisions, and having
instant access to them can only make success more likely
Lower the cost
Accounting can become expensive for businesses, as the level of work can result in the
businesses needing to hire an accounting service on contract or hire several full-time
employees. Accounting software eliminates much of the manual work, which may
allow you to reduce your full-time staff and lower your costs. Indeed, because so many
tasks can be automated, a full-time accountant may not be necessary at all.
Automatic ledger update
The general ledger accounting systems gets automatically updated once the entry in a
subsidiary ledger is posted. For example, when invoicing a debtor through the Debtors
Ledger there is an automatic entry made to the general ledger. This means if all entries
are recorded the general ledger is up to date.
Accounts always in balance (Debits = Credits)
Computerized systems recognize double entry bookkeeping where for every debit entry
there is a corresponding credit entry made. The computerized accounting system accounts
are always in balance. For example, when entering a payment, the system will not allow
you to record a transaction unless you have allocated to an expense (or other) account.
Accuracy and speed of automatic calculations
Computerized systems have automatic calculations built in and therefore there is a slim
chance of making mistakes calculating invoices and VAT. The system automatically
calculates VAT inclusive and exclusive figures. This means VAT reports and forms
provided all relevant entries have been made.
Automatic production of a trial balance from ledger entries
Computerized systems create a trial balance automatically. For example, when electricity
is paid, the Bank account (Asset) gets credited and Electricity (Expense) account gets
debited. Both figures would be included if you were to run a trial balance. From a trial
balance we produce a Profit and Loss Statement and a Balance Sheet and both are
generated in seconds.
Potential to create customized reports and provide additional analysis
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Computerized systems allow you to customize professional looking reports (which may
include your company details and logo). These reports provide additional analysis which
may be needed by the bank, shareholders, suppliers and/or the owners. Far less time is
spent creating reports than using a manual system.
Lower accounting fees
This may or may not eventuate and depends on the ability of the business to produce
an accurate set of accounts from their computerized system. With competent set up and
good training and accurate inputting, then yes, accounting fees should definitely be lower
as you are reducing the workload of your accountant doing your bookkeeping.
Accounting software can provide small business with many efficient ways of managing
daily financial tasks, as well as provide management and ownership with useful reports to
help analyze business performance. Without proper consideration, business owners
sometimes make costly mistakes by investing in the wrong accounting software, and then
they struggle to make the software work or incur even more cost by converting to
different software.
Factors to Consider When Choosing Accounting Software
Scope of Business
The first and most important thing business owners should document before choosing
accounting software is the scope of the business and what accounting tasks the software
should ideally perform. In addition to basic accounting requirements, make a list of other
items you want the accounting software to handle, such as payroll, inventory
management and cost accounting. Consider the future of the business in your decision as
well as current operations. Software that fits perfectly today may not be enough a year
from now. Keep business growth and expansion in mind when creating your scope list.
Modules Included
Once you have defined the scope of the business and the purpose of the accounting
package, screening software possibilities becomes an easier task, because you can easily
eliminate those that do not cover items on your scope list. For each accounting package
that covers your scope, determine which modules are included in the base price and
which modules have an additional cost. For example, some software manufacturers
charge an additional price for a payroll module. Make a note of the entire cost of each
software package so that you can accurately compare the packages.
Access and Portability
If you have a single business location and do not expect that to change, any accounting
package that installs on a network server is suitable for your business. But if you have, or
intend to have, multiple locations, you need to consider how field employees will access
the accounting software, if needed. If you do not have an information technology
employee, setting up exchange server logins may be too complicated a process to install
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or troubleshoot when you have problems. In the case of a small business with multiple
locations, or employees that work from home, Internet-based software may be the best
choice.
Knowledge Required
Powerful, do-it-all accounting software is still useless if your employees cannot learn to
use it. When choosing accounting software, you must take into account the education
level of your employees and the difficulty of the software selections. Some accounting
software requires high-level accounting knowledge for setup and use, while other
software packages are geared toward business owners and employees who do not have
accounting education or experience.
Cost
Once you have eliminated software packages by scope, portability, module and
knowledge requirements, the last factor to consider is the cost of the remaining software
packages. When considering cost, take into account fees for upgrades, annual licensing
and support. Compare technical support packages and factor additional fee support
packages into the overall cost of the accounting software. If you cannot perform the
installation and setup of the accounting software yourself, get estimates for installation
and setup and factor those figures into the overall cost.
Other Factors
Capacity ’ This refers to the software’s limiting characteristics. What is the maximum
number of customers, vendors, or inventory items it can handle? How many line items
can be included in a single invoice, sales order, or purchase order?
Reporting capabilities ’ Does the software already have the capability to produce the
reports that your organization requires? If not, can customized reports be created with a
minimum of time and added effort?
Ease of input ’ You want a system in which information can be entered quickly and
efficiently: full-screen editing, embedded help systems, clear prompts, etc. You also want
a system that does not require excessive mouse use, slowing down entry of information
by continually forcing the user to switch between keyboard and mouse.
Data validation ’ How good is the software at preventing mistakes from being entered
into the system? The program should test for errors (such as duplicate customers and
vendors, incorrect item numbers, and unreasonable amounts or dates). A good system
also notifies the operator of unusually high quantities or unit prices for certain types of
items and offers valid choices along with the notification message.
Error handling ’ Find out how well each program prevents unbalanced transactions,
and how users are stopped from deleting or otherwise losing important data previously in
the system. Some systems provide detailed audit trails for errors to track who is making
each change.
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Security ’ The degree to which sensitive functions and reports can be protected through
passwords will affect how the program rates in security. Ideally, you should be able to
specify which operations each user can perform at any given time. For example, a system
with strong security would allow you to specify that your accounts payable clerk could
only print.
Benefits of using Computers in accounting information system
Computerized accounting system is the method of generating accounting information for
decision making through computer with support of accounting software. This method is
very beneficial and important to businesses. The following are the importance of
computerized accounting system:
 Automatic document production
Instant and reliable receipts, invoices, credit notes, sales order, purchase order,
payroll documents, statement of comprehensive income and statement of financial
position are generated automatically.
 Compatibility
It makes the preparation of accounting for merger and acquisition very easy where
the companies involved use the same accounting software. Manual accounting
system could be too cumbersome for the preparation of accounting for merger and
acquisition.
 Faster Processing/Speed:
Computers require far less time than human beings in performing a particular
task. Therefore, accounting data is processed faster using a computerized
accounting system. The daily total sales, gross profit, total expenditure, total cash,
total accounts receivable, total account payable can be generated within few
seconds. In a nutshell, monthly, quarterly and annual financial statement can be
prepared instantly.
 Accurate Information:
There is less space for error because only one account entry is needed for each
transaction unlike repeated posting of the same accounting data in manual system
 Reliability:
Computer systems are immune to boredom, tiredness or fatigue. Therefore, these
can perform repetitive functions effectively and are highly reliable as compared to
human beings.
 Easy Availability of Information:
The data can be made available to different users at the same time. This is called
data sharing. Financial information is readily available to users of accounting
information for decision making at any time.
 Up-to-date Information:
Account balances will always be up to date since the records are automatically
updated as and when accounting data is entered or stored.
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 Efficiency:
The computer based accounting system ensures better use of time and resources.
 Storage and Retrieval:
Computer based systems require a fractional amount of physical space as
compared to the books of accounts in the form of journals, ledgers and accounting
registers.
 Works as a Motivator:
Employees using computer systems feel more valued as they are trained and
specialized for the job.
 Automated Document Production:
Accounting reports like cash book, trial balance and financial statements are
generated automatically and are easily accessible just by a click of mouse.
 MIS Reports:
It is easier to monitor and control the business using the real time management
information reports generated by the computerized information systems.
Limitations of Computerized Accounting Systems:
The main limitations of computerized systems are being dependent upon the operating
environment they work in.
Some of them are listed as follows:
 Heavy Cost of Installation:
Computer hardware needs replacing and software needs to be updated from time
to time with the availability of newer versions.
 Cost of Training:
To ensure effective and efficient use of computerized system of accounting,
newer versions of hardware and software are introduced. This requires special
training and cost is incurred to train the staff personnel as specialists.
 Fear of Unemployment:
Reflects the feelings of the staff on the introduction of computerized accounting
system, the staff fears redundancy and show less interest in computers.
 Disruption in Work:
When computerized system is introduced, there might be loss in the work time
and certain changes in the working environment.
 System Failure:
The danger of a system crashing due to some failure in hardware can lead to
subsequent loss of work. This occurs when no back-up is retained.
 Time Consuming:
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In order to avoid loss of work at the time of system failure, there is a need for
providing backup arrangements which is a time consuming process.
 Unanticipated Errors not Known:
Unlike human beings, computers do not have the capability to judge or detect
unanticipated errors in the system.
 Breaches of Security:
The danger of viruses and hacking into the system from outside creates a strong
need for security of system. Similarly, the person who has created the specific
program can easily defraud by tempering with the original records.
 Health Dangers:
Extensive use of computers may lead to many health problems such as eyestrain,
muscular complaints, backache etc. resultantly reducing working efficiency as
well as increasing medical expenditure.
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